When starting up a business, one of the first decisions to be made by a business owner is how the business should be structured: sole proprietorship, partnership (with two or more owners), corporation (subchapter C or S), or limited liability company. In making the choice, certain factors need to be taken into account: current or potential size and nature of the business, level of control that the owner(s) desire, business’s risk, vulnerability or possible exposure to lawsuits and judgments, tax implications, including expected profit or loss from the business, cash flow requirements for owners, cash flow requirements for the organization, and many other factors.
While a sole proprietorship is the easiest and least expensive with no separate tax return (activity is reported directly on the owner’s tax return, this type of business structure provides no isolation from liabilities. Partnerships are relatively easy to form; however, a separate tax return for the organization is required and partners are jointly and individually liable for actions of the other partners. C corporations provide limited liability; however, a separate tax return for the organization is required and if owners desire cash flow, the funds are potentially exposed to two levels of tax: one at the entity level; one at the owner level. S corporations provide limited liability and provide tax benefits by taxing profits only at the owner level; however, a separate tax return is required and all owners are required to have the same rights and privileges as to their ownership interests. A limited liability company is generally taxed as a partnership if there are two or more owners (one level of tax at the partner level), provides limited liability and the ability to have differing levels of ownership interest; however, if there are two or more members a separate tax return is required and is the costliest organization to form.